LOMBARD, Ill.–The Federal Reserve moved this week to boost the Fed funds rate. Have depositors been waiting for rates to increase before moving funds? No, according to one new analysis.
While the Fed Funds rate has increased several times over the past two years, and the forecast calls for three to four rate increases in 2018, credit unions and banks to date have not moved in sync. But that does not appear to be a problem for financial institutions.
A new study from Raddon, Deposits Insights: Still Waiting for Rising Rates, finds that unlike the borrowing public that anticipates taking action, “depositors remain surprisingly unmotivated by the rate environment.”
The findings are part of Raddon’s “state of the industry” insights study on deposit and investing habits, expectations, and behaviors of the American consumer public.
According to Raddon, the three trends it said were most noticeable in the study:
1. Consumers are not noticeably tracking deposit rates.
Only 7% of Americans are actively tracking interest rates and will move their money to a new institution to get a better interest rate. That’s basically the same percentage as the 8% who said they were tracking rates in 2007, when the Fed Funds rate was close to 5%, unlike the 1.16% at the time of the survey. Deposit rates were correspondingly higher as well, Raddon reported.
Another 32% watch rates but rarely find a rate that is worth their trouble to switch. “Again, this percentage is basically the same as in 2007. One would have expected the long-term low-rate environment to have quickened enthusiasm, but that has not happened for America’s depositors,” Raddon reported. “Even among the largest depositors, those with at least $50,000 in deposits at all institutions, only 16% actively track rates and will move.”
2. Consumers require a significant premium to take action.
Simply being a few hundredths of a percent higher than the competition “will not ensure new funds,” according to the Raddon Research.
“First, 41% of consumers will not move their funds to a new institution for any price, implying that they are placing higher value on non-price attributes like convenience, service quality, availability, or technology,” Raddon said. “Second, only 11% will move for anything less than a 1% increase. Notably, nearly double that number (19%) would move to a new account at the same institution, showing the risk of cannibalization in the search for new funding.”
Raddon recommended financial institutions could consider a strategy of special new products to attract new dollars and retain at-risk money, while maintaining their floor rates for those customers who value your institution for reasons beyond price.
3. Consumers save for a variety of reasons.
“This point may seem like a no-brainer, but increasingly, it is clear that while the community banking and credit union industries have done well in understanding consumer rationale for borrowing, we do not have the same level of comfort for saving,” Raddon stated. “For example, we know that a customer does not want to get a mortgage: they want to buy a home. No one seeks out an auto loan: they want to buy a car. We have been quite effective in tailoring our message to those desires.”
Consumers are clear about WHY they want to save, and none of those reasons have to do with “opening a deposit product,” according to Raddon. Thirty-nine percent of consumers want extra funds for emergency purposes, a percentage that jumps to 44% of Millennials. Twenty-six percent want money for retirement, but that applies to 32% of Baby Boomers, Raddon found.
“Each of these messages would be very different, even if the product might be the same,” Raddon said in releasing its report. “For the former, an appropriate message might describe availability whenever the customer needs those funds and tools to help build that rainy-day fund. For the latter, discuss security and soundness and possible tax advantages.”